n general, tax law is concerned only with the legal aspects

of taxation, not with its financial, economic, or other

aspects. The making of decisions as to the merits of
various kinds of taxes, the general level of taxation, and
the rates of specific taxes, for example, does not fall into
the domain of tax law; it is a political, not a legal, process.
Tax law falls within the domain of public law—i.e., the
rules that determine and limit the activities and reciprocal
interests of the political community and the members
composing it—as distinguished from relationships
between individuals (the sphere of private law).
International tax law is concerned with the problems
arising when an individual or corporation is taxed in
several countries. Tax law can also be divided into
material tax law, which is the analysis of the legal
provisions giving rise to the charging of a tax; and formal
tax law, which concerns the rules laid down in the law as
to assessment, enforcement, procedure, coercive
measures, administrative and judicial appeal, and other
such matters.
The development of tax law as a comprehensive, general
system is a recent phenomenon. One reason for this is
that no general system of taxation existed in any country
before the middle of the 19th century. In traditional,
essentially agrarian, societies, government revenues were
drawn either from nontax sources (such as tribute, income
from the royal domains, and land rent) or, to a lesser
extent, from taxes on various objects (land taxes, tolls,
customs, and excises). Levies on income or capital were
not considered an ordinary means for financing
government. They appeared first as emergency measures.
The British system of income taxation, for example, one of
the oldest in the world, originated in the act of 1799 as a
temporary means for meeting the increasing financial
burden of the Napoleonic Wars. Another reason for the
relatively recent development of tax law is that the burden
of taxation—and the problem of definite limits to the taxing
power of public authority—became substantial only with
the broadening in the concept of the proper sphere of
government that has accompanied the growing
intervention of modern states in economic, social, cultural,
and other matters.

The Taxing Power

The limits to the right of the public authority to impose
taxes are set by the power that is qualified to do so under
constitutional law. In a democratic system this power is the
legislature, not the executive or the judiciary. The
constitutions of some countries may allow the executive to
impose temporary quasi-legislative measures in time of
emergency, however, and under certain circumstances the
executive may be given power to alter provisions within
limits set by the legislature. The legality of taxation has
been asserted by constitutional texts in many countries,
including the United States, France, Brazil, and Sweden.
In Great Britain, which has no written constitution, taxation
is also a prerogative of the legislature.
The historical origins of this principle are identical with
those of political liberty and representative government—
the right of the citizens
to take cognizance, either personally or through their
representatives, of the need for the public contributions, to agree
to it freely, to follow its use and to determine its proportion, basis,
collection and duration
(in the words of the Declaration of the Rights of Man and
the Citizen proclaimed in the first days of the French
Revolution, August 1789). Other precedents may be found
in the English Bill of Rights of 1689 and the rule “no
taxation without consent” laid down in the Declaration of
Independence of the United States.
Under this principle all that is necessary is that the rights
of the tax administration and the corresponding obligations
of the taxpayer be specified in the law; that is, in the text
adopted by the people’s representatives. The
implementation of the tax laws is generally regulated by
the executive power (the government or the tax bureau).
There have been many encroachments on the principle of
the legality of taxation: Sometimes the base or the rate of
taxation is determined by government decree rather than
by law. The encroachment of the executive power on the
territory reserved to the legislature in matters of taxation is
generally explained by the need to make tax policy more
flexible; urgent amendments may be required by sudden
changes in the economic situation, changes so sudden
that recourse to relatively slow parliamentary procedure
would take too long. A compromise may be reached
between the orthodox doctrine of the legality of taxes and
the need, under special circumstances, to amend texts on
taxation almost immediately, by modifying the text through
a decree or an order of the executive (treasury) and
ratifying it by the legislative power as soon as possible
thereafter.
Limitations on the taxing power
Restraints on the taxing power are generally imposed by
tradition, custom, and political considerations; in many
countries there are also constitutional limitations. Certain
limitations on the taxing power of the legislature are self-
evident. As a practical matter, as well as a matter of
(constitutional) law, there must be a minimum connection
between the subject of taxation and the taxing power. The
extent of income-tax jurisdiction, for example, is
essentially determined by two main criteria: the residence
(or nationality) of the taxpayer and his source of income.
(The application of both criteria together in cases where
the taxpayer’s residence and his source of income are in
different countries often results in burdensome double
taxation, although the problem can be avoided or
restricted by international treaties.) Taxes other than
income taxes—such as retail-sales taxes, turnover taxes,
inheritance taxes, registration fees, and stamp duties—are
imposed by the authority (national or local) on whose
territory the goods are delivered or the taxable assets are
located.
Another self-evident limitation on the taxing power of the
public authority is that the same authority cannot impose
the same tax twice on the same person on the same
ground.
Taxes are generally not levied retroactively, except in
special circumstances. One example of retroactive
taxation was the taxation of wartime benefits in some
European countries by legislation enacted in 1945 when
the war and enemy occupation were over.
A common limitation on the taxing power is the
requirement that all citizens be treated alike. This
requirement is specified in the U.S. Constitution. A similar
provision in other constitutions is that all citizens are equal
and that no privileges can be granted in tax matters. The
rule is often violated through the influence of pressure
groups, however; it is also difficult to enforce and to
interpret unambiguously. In countries in which local
governments are under the control of the national
government, a local tax can be nullified by the central
authority on the ground that it violates the national
constitution if it transgresses the rule of uniformity and
equality of taxpayers.
Aside from the foregoing constitutional, traditional, or
political limitations, there is no restraint on the taxing
power of the legislative body. Once enacted by the
legislature, a tax cannot be judicially restrained. There is
no way of mounting a legal attack upon a tax law on the
ground that it is arbitrary or unjust, but the application of
the law must be correct.

Double taxation
The problem of double and concurrent income taxation by
overlapping governmental authorities has become
increasingly important, particularly in international law. The
growth of international contacts has multiplied the
possibility of an individual or corporation being taxed in
several countries. Moreover, the expanding financial
needs of states have led them to extend their powers of
taxation, with the result that cases of double taxation are
becoming increasingly frequent and serious.
International tax law has two parts. One consists of the
provisions of internal tax law whereby national taxes are
made applicable to nonresidents and to facts or situations
located outside the frontiers. The other part has its source
in the growing number of international agreements
designed to prevent double taxation, either by defining the
field of application of the tax laws of each of the
contracting states or, without limiting the field of
application, by providing for the granting of credits in each
of the contracting states for taxes paid under the
legislation of the other.
Nearly all the agreements aimed at preventing
international double taxation are bilateral; that is, between
two countries. Many bilateral conventions are intended not
only to prevent double taxation but also to enable
cooperation between the fiscal administrations of the
contracting states in combating tax evasion.
Potential problems of internal double taxation exist in
federal countries (including the United States, Switzerland,
and Germany). A state legislature may, for example, tax
all income arising in the state, whether received by
residents or nonresidents, or all income received by
residents, even when the source of income is located
outside the state borders. Therefore, arrangements for
interstate tax coordination may be made, similar to
international conventions. Alternatively, a credit for the
state tax may be allowed in calculating the federal tax paid
on the same object. During the 1980s the “unitary” system
used by some U.S. states to tax the whole income of
multistate corporations created considerable animosity in
other countries. These states employed a formula to
apportion between themselves and the rest of the world
the entire worldwide income of affiliated firms—one of
which did business in the state—that as a group were
deemed to be engaged in a unitary business. This system
departed radically from standard international practice,
which is based on separate accounting for the
corporations chartered in each country. Bowing to
pressure from foreign governments, the U.S. federal
government, and the international business community,
most states have abolished or restricted use of this
method.
Special tax problems arise when countries are involved in
economic integration with each other. When two or more
countries form a customs union (free-trade zone), each
member state keeps its own system of taxation. The aims
of an economic union are more ambitious, entailing far-
reaching limitations on the sovereignty of the member
states; when countries decide to form an economically
integrated area, as have the member countries of the
European Union, they agree to establish a unified
economic and financial market. In tax terms, this means
the abolition of tax (and other) discriminations and
distortions, on the basis that they are likely to impede or
distort normal movements of goods and capital. To this
end the sales and turnover taxes of the (then) European
Communities were replaced with value-added taxes
(VATs), which were “harmonized,” as provided in the
Rome Treaty of March 1957; all member countries have
had to bring their value-added taxes into conformity with a
model prescribed by the organization.

Administration Of Tax Laws

Whereas the right to impose taxes and to determine the
circumstances under which they will be due is a privilege
of the legislative power, administration of the tax law is the
responsibility of the executive power. The head of tax
administration in a central government is the minister of
finance, secretary of the treasury, or chancellor of the
exchequer. The actual administration is generally
separated into departments because taxes differ so
greatly in their bases and methods of collection. In most
countries the ministry of finance has three branches
charged with the levying of taxes. One collects income
taxes; another levies taxes on the transfer of goods and
on such legal transactions as stamp fees, inheritance
taxes, registration dues, and turnover taxes; a third is
responsible for customs and excise duties.
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The levying of taxes can be divided into three successive
phases: (1) assessment, or the definition of the exact
amount subject to taxation under the statute; (2)
computation or calculation; and (3) enforcement.

Assessment
The definition of the amount subject to taxation under a
particular statute requires an analysis of the taxpayer’s
situation and of the legal provisions that apply to him. With
the income tax (and also some taxes on the transfer of
property, such as the inheritance tax), the taxpayer
submits a tax return providing information as to his
occupation, his real and personal property, his
professional expenditures, and other pertinent matters; a
corporation supplies, additionally, copies of the balance
sheet, profit and loss statement, and minutes of the
general meeting that approved these financial reports. The
return, with the attached reports and statements, is meant
to provide such complete information that the assessing
tax official can rely on it to compute the correct tax. In the
United States, the income taxpayer’s liability is computed
by himself subject to review by the taxing authority. Most
tax systems also collect information in other ways, in order
to inform the authorities as to potential tax liabilities.
Records are kept of such matters as the allocation of
income by partnerships, trusts, or estates, and the
payment of fees, interest, dividends, and other sums
exceeding a certain minimum amount. Particularly
important are the statements of amounts paid as wages
and salaries, which constitute the bulk of the income tax
base for individuals in most countries; these are submitted
as part of the withholding (pay-as-you-earn) system.
In the case of an annual levy such as the income tax, a
return must be filed every year. In many countries,
however, individuals who, on the basis of the return
previously filed, appear to earn an income below the
taxable limit do not have to file a new return annually (this
facility is subject to revision at any time). Because it is not
easy for some categories of taxpayers to determine the
precise amount of their occupational net income, the tax
administration frequently reaches an agreement with
professional associations, fixing an estimated basis on
which the net taxable income of their members will be
determined for a period usually exceeding one year;
members are then allowed to provide the tax
administration with simplified factual information (e.g., for
farmers the area of land cultivated, for butchers or bakers
the amount of goods sold), instead of filing the standard
return.
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In many countries a separate assessment procedure has

been organized for income from real property; such is the
case in the various European countries in which the
French system of land register (cadastre) was introduced
at the end of the 18th century. The theoretical income of
each piece of real property is then determined by the
administration of the land register and remains fixed for a
relatively long period, except when important changes are
made in the property.
In examining tax returns, the basic principle is that a return
is assumed to be correct until the assessing official
determines otherwise. In countries such as the United
States, where the self-assessment method prevails, a
minority of returns is selected for audit; most, however, are
only checked as to timely arrival, inclusion of all required
forms and attachments, and arithmetical accuracy. Except
in special circumstances—when, for example, the statute
introduces a suspicion of fraud (e.g., if no return has been
filed) or creates certain presumptions (as when personal
living expenses exceed the reported income)—the
administration has no right to shift onto the taxpayer the
burden of the proof that he has complied with his liabilities.
The golden rule of the tax administrator consists not only
in getting as much money as possible for the treasury, but
in displaying fairness. The rules of taxation naturally have
an authoritarian character, but tax law does not grant the
taxing authority a privileged position nor deprive the
individual of means of defense against arbitrary taxation.
Assessing officials have extensive powers in determining
the amount subject to taxation. In addition to the routine
check, there are numerous sources of information. The
return of one taxpayer can be checked against that of
another: in some countries whenever an individual or a
corporation includes within deductible expenses the
interest paid on borrowed money or the fee paid to a
professional expert, the return must show the name and
address of the payee, and when this information is placed
before the appropriate assessing official he can readily
determine whether the payee has included the payment in
his declared income. Similarly, in countries employing
value-added taxes invoices can be cross-checked to be
sure that tax claimed as a credit by a business purchaser
has actually been remitted by the seller. This ability to
cross-check is often said to be a major advantage of
value-added tax over other forms of sales taxes, but the
advantages are easily overstated, since even with
sophisticated computers cross-checking is difficult.
The procedure varies from one country to another and
depends largely on the circumstances of the case. An
audit may be performed either in the office of the tax
agent, by correspondence, or in the taxpayer’s office. Tax
agents are entitled to examine the books and records kept
by the taxpayer, within reasonable limits. They are, within
the same limits, entitled to question not only the taxpayer
but other persons acquainted with the case. There are,
however, legal guarantees, protecting confidential
communications and prohibiting disclosures of financial
information about the taxpayer. In the United States, for
example, federal and common law protect
communications between husband and wife or between a
client and his attorney acting as such. Under Belgian
income-tax law, certain taxpayers, in the course of the
assessing official’s interrogation, may assert that they are
bound by professional secrecy and unable to
communicate what they claim to be privileged information;
the assessing officer may then consult a special advisory
board, composed of the president and two members of the
taxpayer’s professional or occupational group (lawyers,
doctors, notaries, etc.), which will give its opinion as to the
taxpayer’s probable income.
Banks in most countries are required to make reports of
cash deposits or similar transactions. In most countries, a
safe-deposit box in a bank cannot be opened after the
death of the client unless a tax official is present. On the
other hand, some countries, such as Switzerland,
Panama, and various nations in the Caribbean, have
turned the guarantee of bank secrecy into a national
asset. In such countries banks are legally entitled, or even
required, to refuse information to tax agents concerning
their clients. Funds from both legal and illegal activities are
often channeled through countries with strict bank secrecy
laws in order to escape taxation (as well as for other
reasons).
Tax authorities do a great deal of intelligence work, using
tips from informers such as employees, competitors, and
neighbours of the taxpayer. In the United States, informers
are encouraged by the payment of fees. But it is a
fundamental principle of tax law that information cannot be
used against the taxpayer if it has been obtained by
unlawful means, and that no evidence or testimony is a
valid proof of tax liability unless the taxpayer has had the
opportunity to discuss it.
The assessor may find himself in disagreement with the
taxpayer, either as to the facts (the amount of income, of
deductible expenses, etc.) or as to the manner in which
the taxpayer has resolved a question of law or a mixed
question of law and fact. The tax agent may use his
discretion as to questions of fact, and frequently a
compromise is reached on those questions between the
taxpayer and the tax agent.
Whenever the tax agent decides questions of law, he is
bound by the treasury’s position on the particular problem.
On unresolved issues, lower taxation officers (field offices)
usually request the advice of a higher echelon. Allowing
lower-level fiscal authorities discretion in interpreting tax
laws runs the risk of encouraging corruption. In some
countries, including the United States, written rulings are
issued by the administration in advance, thus avoiding
disputes at the level of the assessment official. In
countries in which this is not done, officials at all levels are
free to give informal advice concerning the tax effects of
proposed transactions. The taxpayer can file a petition
with the competent administrative or judicial authority
whenever he believes that the interpretation of the law by
the assessing official is wrong.

Computation of the tax

The second phase in levying taxes is the calculation of the
amount to be paid. In the American self-assessment
method, the liability for income tax is primarily established
by the taxpayer himself. Under this method, as a rule, the
tax liability reported on the return forms the basis of the
assessment record. If the tax administration discovers that
additional tax is due, a deficiency statement is issued.
Virtually all countries that levy income taxes require
withholding on wages and salaries. In some cases the
withheld tax discharges the taxpayer’s liability and there is
no obligation (and sometimes no opportunity) to file a tax
return. Many countries provide for prepayment of the
withholding tax on dividends and other income from
personal property and have set up a “pay-as-you-go”
system for professional income. Such provisional
payments are calculated by the taxpayer. Advance
payment of all or part of the income tax (on a voluntary or
compulsory basis) before the return is filed, on the basis of
expected income or of the taxable income of the previous
year, is also provided for in some countries. In general,
however, the final computation of taxes levied on income,
on inherited property, or on the transfer of property is
made by the tax administration. Sales taxes and value-
added taxes are calculated by the taxpayers.

Enforcement
If the taxpayer fails to pay within the legally prescribed
period, or within a very short time afterward, the
competent tax office undertakes to collect the amount due.
In proceedings against the taxpayer, the tax administration
is not in the position of an ordinary creditor suing an
ordinary debtor. The law confers a privileged position on
the tax administration among the creditors of the taxpayer.
In addition to interest charges on the amount due, various
kinds of coercive measures are available to ensure
payment. Civil penalties consist generally of a fine added
by the collecting agent when the violation is the result of
negligence rather than of willful neglect or bad faith.
Examples of negligence are the failure to file a required
return on time and understatement or underpayment of the
tax liability without intent to mislead. Civil penalties are
fixed by assessment, so that the procedural remedies of
the taxpayer are identical with those provided for the
assessment of the tax itself.
Criminal tax fraud is severely punished in some countries;
in others failure to fulfill one’s fiscal obligations is seen as
no different from failure to meet other financial obligations.
Certain tax crimes are classed as misdemeanours (such
as willful failure to pay certain taxes, to file certain returns,
to keep proper records, and to supply proper information);
these are punishable by fines or imprisonment or both.
Heavier punishment is provided for crimes classed as
felonies (such as the making of false statements and, in
the United States, tax evasion). In most countries the
criminal penalties can be combined with the civil penalties.
Criminal penalties cannot be imposed by the tax
administration. Offenses against tax law, whether
misdemeanours or felonies, must be tried by courts. The
procedure in criminal tax cases is almost identical with that
in other criminal cases. The accused is deemed to be
innocent until proved guilty; the burden of the proof
inevitably rests upon the prosecutor and not upon the
taxpayer-defendant.

The Judiciary And Tax Law

The taxpayer has a guarantee against unfairness or error
in the application of taxes in the right to appeal to
competent, impartial authorities when he disagrees with
the determination of the assessing officer.
In some countries disputes between taxpayers and the tax
administration are settled by special commissions
consisting of high-ranking civil servants (and also of
members of various occupational organizations). In others,
the decision is the privilege of the judiciary power. In the
vast majority of countries, however, a combination of both
systems prevails. “Out-of-court” jurisdictions—
commissions composed of tax officials and laymen—
frequently act as preliminary settlement committees that
decide factual questions, leaving the interpretation of the
tax law to the courts. In general, when a taxpayer
disagrees with the amounts of the tax as calculated by the
administration, or thinks he has paid too much, he files a
petition with a tribunal, which may be either a specialized
court or the ordinary court competent for civil litigation.
Even if he must exhaust the administrative processes
before he may take a dispute with the tax authorities to
court, he can still invoke the jurisdiction of a judicial court
to reexamine the case, in respect both of the facts and of
the legal arguments.
In almost all countries, the judiciary is headed by a
supreme court whose jurisdiction is limited to questions of
law. The supreme court is generally competent in tax
matters, but an appeal to the court must be based solely
on an alleged misapplication of law; should it appear that
questions of fact or mixed questions of law and fact are
involved, the claim, under most judicial systems, is
dismissed. (The U.S. Supreme Court can also decide on
the constitutionality of an act of the legislative power.) The
judiciary thus has final authority to interpret the tax statute.
This interpretation is binding only in the matter submitted
to the tribunal. But, in any legal system, reference to
interpretative decisions of the courts in comparable cases,
especially of the supreme court, is obviously the best
argument in a litigation about a disputed point of tax law.
When a legal text—in tax law or in other law—requires
interpretation because there is a reasonable doubt as to
its meaning or scope, the first step is to determine the
meaning of the words used, according to the rules of
grammar and syntax, not in isolation but in their context
and taking into account the subject discussed. As stated
by U.S. Treasury tax lawyer Randolph E. Paul, “the
meaning of a sentence may be more than that of the
separate words, as a melody is more than the notes”
(Taxation in the United States, 1954). This is the
necessary “literal” interpretation of the law: when the
current sense of a term is its wide sense, then it must be
accepted in its wide sense in a tax law as in any other,
unless it can be shown that the legislature used the term
in a narrower sense. If the meaning of the text cannot be
determined with certainty by the literal method, then the
interpreter, in seeking the legislature’s intention, will resort
to the “historical” method (the study both of the
preparatory work and of the place occupied by the text in
successive laws on a specific matter) and to the
“systematic” or “teleological” interpretation (the position
occupied by a legal provision in a legal system as a whole,
and the object pursued by the legislature in producing that
system).
In addition to these general principles common to the
interpretation of all legal texts, some special rules apply to
the interpretation of tax laws. One rule is the autonomy of
tax law, meaning that tax laws pursue aims that are
different from those of other bodies of law. The tax claim is
a claim under public law. Its cause lies not in a contractual
obligation but in an expression of unilateral will, a decision
by the public authority. The function of taxes in the
organization of the budget is incompatible with the
principles of the law of contracts; such principles apply
only to relationships under private law and, therefore,
cannot be invoked to interpret provisions of tax law.
Other special rules of interpretation of tax laws derive from
the nature of the tax obligation. In a democratic system, a
tax can only be imposed by law. Thus the courts or the
administration do not have a “creative power” to make
things or operations taxable through an analogic
interpretation of the text, in cases where it is not proved
that the legislature wished them to be taxable. On the
other hand, the rule of legality of taxation does not always
operate in favour of the taxpayer: the person or body
entrusted with the task of applying or interpreting the law
cannot introduce any attenuation or relaxation of its effect,
even though this might be more than amply justified by
circumstances, except in cases where the legislature has
authorized the judge or the administration to apply the
rules of equity within certain legally prescribed limits.
Baron Jean M.J. van Houtte
Charles E. McLure
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